September 21, 2020

DealBook: Blackstone Says Plain L.B.O.’s Are Too ‘Pricey’

While the Blackstone Group reported its best quarterly earnings since going public in 2007, the investment firm’s big gains came once again from its big real estate division.

So what about the business it’s best known for: private equity deals?

According to Blackstone’s president, Hamilton E. James, the traditional leveraged buyout just isn’t as attractive, for now.

That is reflected in the results of the private equity business. Revenue dipped slightly in the quarter, to $273.7 million, and its profit fell 9 percent, to $175.5 million.

Mr. James said on a conference call with reporters on Thursday that a litany of factors made it harder for private equity firms to buy companies of size. He acknowledged that strategic buyers had again returned to the fore, their treasuries bulging with cash and their lenders ready to loan money at attractive rates.

“There’s a lot of corporate competition that has come out of the woodwork,” he said. “That has made the plain vanilla buyout pricey.”

Bankers and private equity officials have said for some time that while buyout firms have plenty of cash to put to work — Blackstone said it had $16.9 billion available as of the quarter’s end — they still face a few constraints.

Banks still require equity checks of about 25 to 30 percent, meaning that a buyout firm would need to put up $2.5 billion to $3 billion in a $10 billion leveraged buyout. That is a lot for any one shop to commit to, requiring them to form consortiums (something investors are not too wild about these days) or find other sources of capital, like sovereign wealth funds or limited partners willing to co-invest.

And many deal-makers say corporate buyers can afford to pay more for any given deal, since they can squeeze out more cost savings than a buyout firm. In fairness, however, some private equity shops can combine an acquisition with an existing portfolio company to reap some of the same cost benefits.

In any case, Blackstone is turning to other opportunities for now, Mr. James said. The firm is more focused on investment opportunities in the energy sector, emerging markets and in “smaller companies needing growth.”

And Mr. James predicted that leveraged buyouts would eventually return, especially as corporations spent their cash piles.

Article source: http://feeds.nytimes.com/click.phdo?i=c086dee997f47b03c9c344728b8da4fa

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